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The 1QFY12 results disappointed us with single digit (or negative) growth in about half its
businesses. Margin pressure, despite several limited competition US products, was disappointing.
DRL guides to a stronger 2H, which we believe is already priced in. Sell maintained on weak
business mix and rich valuations.
1QFY12: margin pressure disappoints
Dr Reddy’s (DRL) reported 1QFY12 revenues of Rs19.8bn (+18% yoy) due to strong growth in
the US (+48%). While the PSAI and Betapharm businesses remained weak, 7% and -15% yoy
growth respectively, we were disappointed at the second consecutive weak quarter in the
domestic business (only 6% yoy). EBIT margin contracted by 130bp yoy to 13.2% vs our estimate
of 14.7% due to: 1) margin pressure in PSAI and Betapharm business; 2) higher OTC related
SG&A spend in Russia (to persist); 3) higher staff costs; and 4) overhead costs of the Bristol
facility. Even after excluding the one-time VRS charge of Rs136m, adjusted EBIT margin was still
low at 13.8%. Adjusted for other one-offs (low tax rate, interest on bonus debentures), adjusted
PAT of Rs2.5bn was in-line with our estimate.
Recovery only in 2H; already priced in, in our view
DRL expects the current headwinds in domestic formulations and PSAI (pharmaceutical services
and active ingredients business) to alleviate only by 2H. Moreover, it expects the benefits from
fondaparinox and its recently-acquired penicillin facility to gradually ramp up and be visible also
from 2H. While DRL has received USFDA approval for gAllegra D-24 OTC, it is awaiting
approvals from the Narcotics divison (both India and US) and thus expects launch by end -
2QFY12. We highlight that the six month exclusivity on Olanzapine 20mg in US should be a key
growth driver in 2H which we have already estimated to contribute Rs5bn to its FY12 revenues.
This, however, would result in higher tax rate of 21%. We highlight that 1Q has met 17% and 19%
of our FY12F EBIT and PAT respectively, leaving adequate room for a stronger 2H and therefore
we leave our forecasts unchanged.
Margin pressure woes now add to weak business-mix concerns: Sell
We acknowledge DRL’s robust ANDA pipeline but believe it is already priced in. Our TP of
Rs1,360 is derived by valuing its core business at Rs1,309 (FY12F PE of 21.4x) and Para-IV
pipeline at Rs51. Sell maintained on weak business mix and rich valuations
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The 1QFY12 results disappointed us with single digit (or negative) growth in about half its
businesses. Margin pressure, despite several limited competition US products, was disappointing.
DRL guides to a stronger 2H, which we believe is already priced in. Sell maintained on weak
business mix and rich valuations.
1QFY12: margin pressure disappoints
Dr Reddy’s (DRL) reported 1QFY12 revenues of Rs19.8bn (+18% yoy) due to strong growth in
the US (+48%). While the PSAI and Betapharm businesses remained weak, 7% and -15% yoy
growth respectively, we were disappointed at the second consecutive weak quarter in the
domestic business (only 6% yoy). EBIT margin contracted by 130bp yoy to 13.2% vs our estimate
of 14.7% due to: 1) margin pressure in PSAI and Betapharm business; 2) higher OTC related
SG&A spend in Russia (to persist); 3) higher staff costs; and 4) overhead costs of the Bristol
facility. Even after excluding the one-time VRS charge of Rs136m, adjusted EBIT margin was still
low at 13.8%. Adjusted for other one-offs (low tax rate, interest on bonus debentures), adjusted
PAT of Rs2.5bn was in-line with our estimate.
Recovery only in 2H; already priced in, in our view
DRL expects the current headwinds in domestic formulations and PSAI (pharmaceutical services
and active ingredients business) to alleviate only by 2H. Moreover, it expects the benefits from
fondaparinox and its recently-acquired penicillin facility to gradually ramp up and be visible also
from 2H. While DRL has received USFDA approval for gAllegra D-24 OTC, it is awaiting
approvals from the Narcotics divison (both India and US) and thus expects launch by end -
2QFY12. We highlight that the six month exclusivity on Olanzapine 20mg in US should be a key
growth driver in 2H which we have already estimated to contribute Rs5bn to its FY12 revenues.
This, however, would result in higher tax rate of 21%. We highlight that 1Q has met 17% and 19%
of our FY12F EBIT and PAT respectively, leaving adequate room for a stronger 2H and therefore
we leave our forecasts unchanged.
Margin pressure woes now add to weak business-mix concerns: Sell
We acknowledge DRL’s robust ANDA pipeline but believe it is already priced in. Our TP of
Rs1,360 is derived by valuing its core business at Rs1,309 (FY12F PE of 21.4x) and Para-IV
pipeline at Rs51. Sell maintained on weak business mix and rich valuations
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